How the EU works:
all you need to know
Author: Andrew Jones
Contents
What does the EU do, what is it for, and how does it operate?
2
Background
2
What is the EU? A brief history
2
The legal foundations of the EU
7
Institutions
8
Introduction: The EU and national parliaments
8
The Big Five (1): The Commission
9
The Big Five (2): The Council
10
The Big Five (3): The European Council
11
The Big Five (4): The European Parliament (EP)
11
The Big Five (5): The European Court of Justice
12
The Budget
12
The policy outputs of the EU
14
The Single Market
14
Competition Policy
15
The Common Commercial Policy
16
Agriculture, the Common Agricultural Policy (CAP), and Fisheries
16
Regional Policy and Economic Development
17
Justice and Home Affairs
18
The Eurozone
18
Further reading/sources
21
Related briefings
21
What does the EU do, what is it for, and how does it
operate?
There has been, according to many commentators, an information deficit on the conduct
and quality of the debate accompanying the current EU referendum. This report attempts,
as far as is possible, to offer a value-free overview of the workings of the EU. It covers:
•• the EU’s history
•• a description of the EU’s legal foundations
•• key institutions
•• an overview of six key outputs of EU decision-making – the Single Market,
Competition Policy, Trade, Agriculture, Regional Policy, and Justice and Home Affairs
•• a brief review an analysis of the euro and the Eurozone crisis.
There are links to LGiU briefings at the end that consider the EU structural funds and links
to websites for further reading are also provided.
Background
On 27 May, Andrew Tyrie MP, Chairman of the Treasury Select Committee, in commenting
on the woeful state of the information made available to the public in the current
EU referendum debate said: ““The arms race of ever more lurid claims and counterclaims made by both the leave and remain sides is not just confusing the public. It is
impoverishing political debate”.
This comment was made in a press release accompanying the Committee’s release of
its report on the economic costs and benefits of leaving the EU. Links to the report are
available at the end of this briefing.
Possibly, a larger part of the problem for the general public in assessing the claims made
by campaigners is the absence of any kind of context in which to assess their validity. Part
of this stems from the lack of a counterfactual which would indicate what Britain would be
like in the absence of the EU. Much of the debate is, frankly, based on conjecture.
This report is intended as a modest contribution to closing the information deficit referred
to by Andrew Tyrie. No attempt is made to comment on the “lurid claims” made in both
sides of the debate, or indeed on whether they are lurid or not. It attempts to supply a
context in which readers can assess for themselves the credibility of the various claims
made. As far as is possible, it offers a value-free overview of what the EU does, what it is
for, and how it operates.
Despite its length, there are many omissions, and the report remains, as described, an
introductory primer.
What is the EU? A brief history
Supplying a simple or short definition for the EU is no easy matter. At the EU’s heart is
the Internal Market (otherwise the Common Market or Single Market), which is probably
its most successful and enduring achievement. The EU can be understood through the
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institutions created to carry forward the lengthy and intricate process of treaty negotiation
and implementation that created and support the Single Market. These institutions operate
not only between and across Member States, but also between and across the EU and
other countries and global entities like the World Trade Organisation (WTO). But the EU is
also a collection of sovereign nation states linked by a system of treaties and agreements.
These do not all apply to each state equally, and allow considerable scope for interpretation
and application by Member States. Each Member State wants something slightly different
from the EU and their different histories means that each has a slightly different relationship
with the rest of the world. Hence the EU is understood through multiple national and
international lenses. In their assessment, those unsympathetic to the EU differ in their
reasons whilst those supporting it differ in what sort of EU they would like to see.
To complicate matters further, the EU remains a work in progress, even with its lengthy
history. This applies in particular even to its most successful project, the Single Market.
There have been numerable twists and turns, stops and starts, setbacks, and changes in
direction over the course of its development. It has been buffeted by crises originating
from outside its borders, to and from which it has adapted and recovered, although on
some occasions it has had to dig itself out of holes it dug for itself. Every time a new
Member State is admitted, its character changes slightly. Despite all this, there are some
consistent strands that have guided it, although these are at times vague and themselves
open to multiple interpretation. Nonetheless, the best way of arriving at an overview of the
EU is to uncover these consistent strands through a brief tour of its history.
There is no disagreement that the initial impulse to the creation of what was eventually
to become the EU was in a search for solutions to centuries of European conflict in the
aftermath of the destruction that accompanied the Second World War. The power vacuum
in Europe immediately following the war was filled by the USA and the Soviet Union, the
emergent superpowers on Europe’s western and eastern periphery. The USA was keenly
interested in Western Europe’s economic re-construction, and co-operation between
European states was encouraged through the distribution of US aid under the Marshall
Plan. Shared security concerns and the imperative of economic re-construction created a
context and opportunity in which proposals for co-operation made by European countries
(otherwise still deeply suspicious of each other) could be made and seriously considered.
The formulation of such proposals, and the ideas that accompanied them, are associated
in particular with four individuals equipped with a combination of long-term vision of what
they wanted for the future of Europe and day-to-day pragmatism. One of these was Jean
Monnet, a French diplomat who had worked for the League of Nations between the two
world wars. Another was Konrad Adenauer, Germany’s first post-war Chancellor, whose
constructive relationship with a French Foreign Minister, Robert Schuman, helped create
the first manifestations of European economic co-operation. The fourth was Paul-Henri
Spaak, an influential Belgian politician who had negotiated the Benelux customs union of
Belgium, the Netherlands, and Luxembourg whilst in wartime exile.
The Big Idea, which remains one of the continuous threads in the development of the
EU, was enunciated in the Schuman Declaration, which announced the creation of the
European Coal and Steel Community (ECSC). In the Declaration, it was stated: “The
solidarity in production thus established [by the ECSC] will make it plain that any war
between France and Germany becomes not merely unthinkable but materially impossible”.
The ECSC created pooled sovereignty over coal and steel production, located in
abundance along the Franco-German frontier, which henceforth would be used to support
the economic development of its signatory countries. It was also meant to allay mutual
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suspicions and fears, because coal and steel in the mid-twentieth century were essential
engines of war.
The six signatories at the Treaty of Paris in 1951, which brought the ECSC into being,
were France, Germany, Italy, and Benelux. The Treaty of Paris re-stated the Big Idea in a
slightly different way, as follows: “Europe can be built only through practical achievements
which will first of all create real solidarity, and through the establishment of common
bases for economic development”. In other words, European integration could evolve in
a piecemeal way on the basis of improvements to the prosperity of Europeans through
co-operation. The enduring nature of the Big Idea has created an interminable debate
over whether the EU should be thought of primarily as an ‘economic’ project or a ‘political’
project, but in fact the two are indissoluble. Because the founders of the EU believed that
peace in Europe could only be achieved through progress in economic development by
co-operation, such endeavours had to succeed in delivering tangible economic benefits,
otherwise the incentive to co-operate, and the political support for it, would be lost.
In the event, the economic benefits delivered by the ECSC were somewhat unspectacular.
But this early experiment created the embryonic institutions of the EU, in the form of a
High Authority (precursor to the European Commission), of which Monnet was the first
president, a Council of Ministers, and a Common Assembly. More importantly, it paved
the way towards more enduring models for economic integration. Following a series
of intergovernmental meetings chaired by Spaak, the Treaty of Rome, regarded as the
founding document of the EU, was signed by the six signatories of the Paris treaty in
March 1957. The Treaty established the European Economic Community (EEC), or the
Common Market, with provisions for reducing customs duties and import quotas between
countries, a common external tariff, and a competition policy. Articles 3a and 3c of the
Treaty establishing the EEC made provisions for the famous ‘four freedoms’, of movement
of goods, people, services, and capital. In the Treaty’s opening preamble there is a
vague reference to laying the “foundations of an ever closer union among the peoples of
Europe”, but the rest of it reveals the primacy of economic co-operation.
The EEC area boomed economically in the 1960s, but relations between countries was
strained by disagreements over whether legislative proposals should be settled by
consensus or majority voting, and by France’s veto of the UK’s application for membership.
Much of the tensions originated in De Gaulle’s ambition of a leadership role for France in
Western Europe. Following De Gaulle’s resignation, the Heads of Government and State
(HOGS) agreed to open accession negotiations with the UK and other applicant states, to
commit to the establishment of economic and monetary union by 1980, and to establish a
means to co-operate in foreign policy.
The 1970s was a period of expansion horizontally (in new membership) and vertically (in
new policy areas). In 1973, Britain, Ireland, and Denmark joined what had, following treaty
consolidation, become the European Community (EC). Norway voted to stay outside.
Greece joined in 1981. However, EC plans for closer economic integration and for cooperation in foreign policy were blown off course by two shocks to the world economic
system. The first of these was the collapse of the Bretton Woods international system of
exchange rate controls in two stages between 1971 and 1973 that had been established
after the Second World War. For the EC the Bretton Woods system was a convenient
means of ensuring that the gains from trade through the Common Market would not be
undermined by competitive exchange rate adjustments.
The EC attempted to replace the Bretton Woods system by a system known as the
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“snake in the tunnel” which meant exchange rates between European countries were
allowed to fluctuate within wide bands. Unfortunately, this solution was stymied by the
second economic shock caused by the decision of the Organisation of Arab Petroleum
Oil Exporting Countries (OAPEC) to embargo oil sales to the Netherlands (because of its
support for Israel in the 1973 Yom Kippur War) and to triple the price of oil, plunging much
of the developed world into recession. EC Member States negotiated bilateral trade deals
with the oil cartel, which, together with the sense of crisis accompanying the recession, led
to much questioning (then, as now) about the value and relevance of the EC. Its tarnished
record in solidarity was restored somewhat with the strengthening of something called
European Political Cooperation (EPC), which essentially was the EC’s foreign policy. The
EC commenced a Euro-Arab dialogue, in addition to negotiating new trade deals with the
states around the southern Mediterranean Basin.
However, the EC remained divided by thousands of what are known as Non-Tariff Barriers
(NTBs) which inhibited the development of cross-border trade between EC countries.
More explanation of NTBs and their progressive removal is given below, because they
are essential in understanding the Common (or Single, or Internal) Market, but for now
they can be understood as product or production standards which give preference to
local goods against outside competition. In the 1980s, the Common Market became
referred to as the Internal Market, and the phrase appears in the 1985 White Paper on
Completing the Internal Market. The White Paper proposed eliminating NTBs by 1992.
In an intergovernmental conference in 1985, member governments agreed to bring the
Commission’s ideas on completing the Internal Market into the Treaty framework. The task
was led by Commission President Jacques Delors, who is credited with creating a new
phase of development and renewal for the EU. Delors found an unlikely ally in Margaret
Thatcher, who saw the Internal Market as a vehicle for economic liberalisation on a
continental scale.
The 1980-1990s period of renewal was also one of enlargement. Spain and Portugal were
admitted in 1986, and Austria, Finland, and Sweden in 1995. The Single European Act
(SEA), which came into force in 1987, was the first major revision to the EC treaty in thirty
years. The SEA’s most important feature was to set the deadline for the removal of ITBs,
but it also made important changes to the EC’s institutions. In addition, it rekindled interest
in Economic and Monetary Union (EMU), and in 1989 Delors set out a plan for the creation
of EMU in three phases – fixing exchange rates, establishing a European Central Bank
(ECB) and creating a single currency. Further, the collapse of Soviet Communism at the end
of the 1980s catapulted the EC into a radically new phase of development. The EC played
a pivotal role in enabling and stabilising the democratic transition of Eastern Europe, and
deeper integration was both an essential requirement of enlargement and a means of
anchoring a re-unified and more powerful Germany within a European alliance. The fifth
enlargement was the largest ever in terms of the number of states joining the EU. In 2004,
the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia
and Slovenia gained accession. Bulgaria and Romania joined in 2007 and Croatia in 2013,
bringing the total number up to 28.
Four further treaties established the current character of the EU. The Maastricht Treaty,
which came into force in 1993, created the EU and is therefore also known as the Treaty of
the European Union (TEU). Maastricht formalised the creation of EMU over three phases,
and established the rights of EU citizens (to vote in European Parliament elections anywhere
in the EU, to stand as a candidate in local and EU elections, and to seek consular assistance
from any Member State’s Consul or Embassy). Ratification of Maastricht was extremely
messy, and modifications to the Treaty had to be made following national referendums.
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Denmark gained an opt-out from monetary union, joining two other countries – Sweden
and the UK - which had effectively obtained indefinite opt-outs from the euro through
other means. The 1998 Amsterdam Treaty introduced new powers for co-operation in
immigration, visas, resident permits, asylum, refugees, and certain judicial matters (with
op-outs for Britain, Denmark, and Ireland) and strengthened the EU’s commitment to
environmental sustainability. The Treaty of Nice (2003) made further modifications to the
EU’s institutions (of which more details below) in anticipation of further enlargement.
Hovering in the background to the developments described above were concerns that
the existing institutional framework did not supply appropriate governance capacity for an
enlarged union or for the EU to play a credible role in world affairs. The European Council
agreed a new Constitutional Treaty in 2004, which, it was hoped, would both streamline
and democratise the EU’s governance. The ratification of the Treaty was even messier
than Maastricht, and was rejected by the French and Dutch in popular referenda. The
result was the fourth of the post-SEA treaties, the 2008 Lisbon Treaty which delivered the
needed institutional reforms whilst abandoning the more troubling implications for national
sovereignties of a grandiose (albeit mostly symbolic) over-arching constitution. Earlier, the
European Council had stressed that the EU had to fully absorb its new members before
further enlargement, by which was meant it wanted to put a brake on further enlargement.
Among other things, the Lisbon Treaty created the post of the High Representative for
the Union in Foreign Affairs and Security Policy (High Representative) and a new European
External Action Service responsible for EU missions around the world. Ireland rejected
the Treaty in a first referendum, but accepted it in a second after concerns about taxation,
neutrality, and right to life had been addressed. The UK, the Czech Republic, and Poland
obtained opt-outs to the Charter on Fundamental Rights. Other, more fundamental
provisions of the Lisbon Treaty are retuned to below on the section on the EU’s legal
foundations.
Despite the truculent nature of Treaty ratification, the first decade of the 21st Century was
a successful one for the EU. It had absorbed and adapted to the momentous disruption
that accompanied the collapse of Soviet Communism and had built a much enlarged
union. It had completed the Eurozone, and created a European Central Bank to manage
the new currency. The first ten years of the euro were regarded as a resounding success,
even as the cracks in the new structures had started to appear by the end of the decade.
The Eurozone crisis is dealt with in more detail below because it is essential to
understanding the current stage of development of the EU. However, it is a suitable
topic with which to bring this history towards a conclusion because the Eurozone crisis
has undoubtedly placed immense political strains on the EU, and, as with the oil crisis in
the 1970s, undermined the spirit of solidarity. There have been resentments in Northern
Europe over perceived ‘bail outs’ for countries in Southern Europe, and resentments in
Southern Europe about a perceived imposition of austerity from countries in Northern
Europe. The protracted nature of the European recession has been blamed on the euro,
creating a crisis of legitimacy, which, by demonstrating the opposite, confirms the validity
of the Big Idea – that the EU can only survive and progress on the basis of tangible
economic benefits for its people.
Against the expectations of many, the Eurozone has held together, albeit with recurring
crises over Greece. Last year, however, the EU was engulfed in yet another crisis, prompted
by the mass displacement of people from war-torn regions on the EU’s southern and
eastern periphery. This has been both a humanitarian crisis of enormous scale and a
political crisis. Once again against all predictions, a solution, consisting of a GermanLGiU |
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brokered deal between Turkey and the EU appears to have worked, at least in terms of
slowing the flow of migrants into the EU. The political ramifications of the latest crisis have
thrown up new uncertainties for the EU, but it cannot really be said of it that is has ever
faced a fully certain world. This fact alone provides no support for either the ‘leave’ or
‘remain’ case in the UK’s referendum.
The legal foundations of the EU
The EU is a fiendishly complicated phenomenon, and matters are not helped by a
tendency to refer to things by multiple names (witness the Common Market, the Single
Market, and the Internal Market). The Treaty of Rome was in fact two treaties, but the more
important was the Treaty Establishing the European Economic Community, and is usually
referred to as the Treaty of Rome because it is easier to say. The Treaty Establishing the
European Economic Community was renamed the as the Treaty Establishing the European
Community (TEC) by the Maastricht Treaty, although, as we have seen, the Maastricht
Treaty itself is formally known as the Treaty Establishing the European Union (TEU). The
Lisbon Treaty renamed the TEC as the Treaty on the Functioning of the European Union, or
TFEU. Now the ‘Treaties’ refer to the TEU and the TFUE.
The treaty formulation of the past couple of decades has been shaped by two opposing
governance principles – supra-nationalism and inter-governmentalism. In the purest form
of the first, sovereignty is passed to a supranational authority (like the Federal Government
of the USA) with sufficient autonomy to make and implement policies for the benefit of the
federation as a whole regardless of the preferences of individual states. In its purest form,
the second, inter-governmentalism, means no transfer of sovereignty, power remaining
in the hands of national politicians and officials, and co-operation secured on the basis
of unanimous agreement. These distinctions might become clearer when we look at the
actual structure of the EU below. Given the torrid nature of much current debate, it might
be surprising to learn that the zenith of European supra-nationalism was actually in the
now-defunct ECSC.
However, the two principles clashed at Maastricht, where some Member States wanted
to extend supra-nationalism to areas not hitherto covered by the Treaties, such as social
policy and criminal justice, but were opposed by other states alarmed by this potential
transfer of sovereignty. Maastricht solved this problem by creating a ‘three pillar’ structure
where the first, supranational pillar concerned all the areas of economic integration
covered in the Treaty of Rome, the SEA, and Maastricht, areas in which all Member States
were happy (more or less) to transfer sovereignty to the EU. The second pillar concerned
foreign and defence matters, and the third justice, police, and home affairs. Both second
and third pillars remained intergovernmentalist, that is, not subject to supra-national
decision-making or EU court rulings. However, much of third pillar issues were merged into
the first pillar by the Treaties of Nice and Amsterdam, with a few exceptions, and, as we
have seen, wholesale opt-outs for Britain and other countries. Some of this shift was due
to a perceived need to respond to the internationalisation of crime, terrorism, and human
trafficking, for a more co-ordinated response to asylum and immigration, and a need to
harmonise things like the international transfer of pensions, and divorce and contract law.
The Lisbon Treaty formally placed all three pillars into one, supranational structure, but in
practice, the second pillar (foreign and external security) remained intergovernmental in
nature. The Lisbon Treaty did not remove the distinction between policy areas in which EU
law applies and areas which it does not. It did, however, create a ‘legal personality’ for the
EU, enabling it to enter into agreements with nations and organisations.
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The accumulation of treaties, legislation, legal acts, directives, and court decisions
constitutes the body of EU law. It is sometimes referred to as the acquis communautaire,
or more simply, the aquis. Among other things, it governs the application of countries
to become Member States (see below). There are three important governing principles
of EU law. The first of these is known as Direct Effect, which means that EU law creates
rights which citizens can rely on when they go before their courts, or that EU law must be
enforced by national courts as if they had been passed by their own national parliaments.
A famous example is that of a Sabena female flight attendant who claimed she was paid
less than male flight attendants. This was not in violation of Belgian law at the time, but as
the Treaty of Rome provided for equality of pay between the sexes, the European Court
ruled in 1976 that it had the force of law in Belgium, and the flight attendant won her case.
Another is the principle of Primacy, which means that where a national law is in conflict with
EU law, it is EU law that must be enforced. Finally, the principle of Autonomy means that EU
courts are entirely independent of Members States’ legal systems.
According to TEU Article 49, membership of the EU is open to any European state which
respects the values referred to in Article 2 of the TEU and is committed to promoting
them. These Article 2 values are “respect for human dignity, freedom, democracy, equality,
the rule of law and respect for human rights, including the rights of persons belonging to
minorities.”
This is based on the 1993 Copenhagen Criteria agreed when it became clear many Eastern
and Central European countries would apply to join. In a Conclusion of the Copenhagen
Presidency, it was stated that: “Membership requires that candidate country has achieved
stability of institutions guaranteeing democracy, the rule of law, human rights, respect for
and protection of minorities, the existence of a functioning market economy as well as the
capacity to cope with competitive pressure and market forces within the Union”. There is a
further requirement that all prospective members must enact legislation to bring their laws
into line with the acquis.
It is important to note that an application to join can be vetoed by any Member State. The
institutions of the EU are dealt with in more detail below.
Institutions
Introduction: The EU and national parliaments
The EU’s measure of which policy decisions should be made at EU level and which ought to
remain at national or local levels is referred to as subsidiarity. The principle was codified in
the Treaty of Amsterdam, and simply means that only where collective action is necessary,
and more efficient and effective than otherwise, decision-making should be transferred
to the EU level. This transference of authority is most obvious in the areas of the Internal
Market and Monetary Union. In addition, there is a principle of proportionality, which
means that Member States are only obliged to do what is necessary to achieve Treaty
objectives in the areas where the union has competence.
As will be seen below, the EU is an amalgam of the national policy capabilities and
demands of each Member State and the shared decision-making framework at EU
level. The key institutions are supported by networks of national committees and policy
networks. The Council and the European Council are constituted by Ministers and leaders
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of national governments directly elected by their by national electorates, but the Councils,
along with the European Parliament and the Commission, do not make decisions without
reference to national parliaments.
The Lisbon Treaty gave national parliaments an enlarged role in guarding against the EU
encroaching in areas where it should not. If a sufficient number of national parliaments
become convinced that a legislative initiative would be better taken at a local, national, or
regional level, the Commission either has to withdraw it or give a clear justification of why
the initiative is not in breach of the principle of subsidiarity. In what is known as the ‘yellow
card’ procedure, a parliament can, within two months of the release of a draft law, submit
an opinion that it violates the principle of subsidiarity, which will trigger a voting system
among all national parliaments. Under the ‘orange card’ procedure, the Council and the
EP must consider the national parliaments’ objection. Clearly, these provisions give no
direct power to national parliaments, but given the brutal media scrutiny that is likely that
accompany a yellow or orange card, they act as a powerful deterrent.
There are five key institutions of the EU which together constitute a shared framework for
collective decision-making. Of the five institutions, the Commission and the European
Court of Justice are the most obviously supra-national. The others are intergovernmental
to varying degrees, depending on the issue at hand. The remainder of this section
describes each of these ‘big five’. Strictly speaking, the European Central Bank (ECB)
should be included, but as it affects the UK to a lesser extent, it is dealt with in the section
below on the Eurozone. For the sake of brevity, the European Court of Auditors (ECA) and
some other bodies are also omitted.
The big five (1): The Commission
The European Commission (EC) is the co-executive and bureaucracy acting in the interests
of the EU as a whole. Commission staff work for the EU, not individual member states.
There are about 34,000 Commission staff based mostly in Brussels and Luxembourg. All
EU institutions combined employ about 55,000 people. For comparison, in March 2015, the
UK civil service employed about 406,000 people.
The EC is organised into 27 Directorates-General (DGs) under the supervision of the
Commissioners and the President. Each DG is concerned with a specific aspect of policy, of
which the more important are dealt with below. Through the DGs, the Commission acts as
the guardian, overseer, and (together with the European Court of Justice), enforcer of EU
treaties.
The Commission also initiates and executes policy. Among the most important instruments
for legislative action are proposals, directives, and legislation. Proposed legislation always
follows an extensive process of consultation before it is placed before a full meeting of the
Commissioners (sometimes known as the College). The Commissioners can either accept
the proposal, send it back for a re-draft, or defer a decision. If the proposal is accepted, it
is sent to the European Parliament, the Council, and National Parliaments.
A system of committees, known as comitology, advises the Commission on the
implementation of Council and EP decisions. There are over 200 committees with
advisory, regulatory, and management functions regarding the powers delegated to the
Commission. The committees are made up of representatives from national governments.
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The Commission’s President is nominated by the European Council on the basis of
qualified majority vote (QMV). Under the Lisbon Treaty, the European Council is required to
take into account the results of the European Parliament (EP) elections, and to consult with
the EP before making their nomination. If the EP does not approve a European Council
nomination, the European Council will propose a new candidate.
Both the President and the Commissioners serve five year terms. Each Member State is
entitled to one Commissioner. The proposed slate of Commissioners is approved by the
European Council and requires the consent of the President. Committees of the EP hold
hearings to query each nominee and have in the past forced replacements of nominees.
The composition of the Commission is confirmed at a plenary session of the EP. The EP has
a supervisory role over the Commission, has the power to force a Commission to resign,
and can censure the Commission as a whole (but not individual Commissioners).
The big five (2): The Council
The Council (formerly known as the Council of Ministers and sometimes known as the
Council of the European Union) has the power to delegate tasks to other EU bodies
and can veto many important decisions. The Council has executive responsibilities in
foreign policy and security in the instances where it has a shared right of initiative with
the Commission, but in general does not technically initiate policy. However, it decides
(with the EP in most areas) on proposed legislation sent to it by the Commission, and
can influence the Commission in various ways, for example through resolutions and
recommendations and by asking the Commission to initiate proposals from which
legislation might develop.
Government ministers from each of the Member States assemble in various councils
formed to deal with each of the EU’s policy areas. The ten councils are: Agriculture and
Fisheries; Competitiveness; General Affairs; Economic and Financial Affairs; Education,
Youth, and Culture; Employment, Social Policy, Health, and Consumer Affairs; Foreign
Affairs; Justice and Home Affairs; and Transport, Telecommunications, and Energy. The
most powerful are the General Affairs Council (GAC) the Foreign Affairs Council (FAC) the
Justice and Home Affairs Council (JHA) and the Economic and Financial Affairs Council
(Ecofin). The Council is supported by a secretariat of about 3,500 staff and the Committee
of Permanent Representatives (COREPER) consisting of diplomats seconded from each
Member State’s Foreign Ministry.
Council voting on major items of legislation may take five forms: Unanimity, consensus,
constructive abstention, qualified majority voting (QMV) or enhanced co-operation. The
TEU requires unanimity when the Council votes on the Multiannual Financial Framework
(the Budget) and other finance issues, treaty changes, enlargement, the Common
Foreign and Security Policy (CFSP) and the Common Security and Defence Policy (CSDP),
taxation, and certain aspects of Justice and Home Affairs. In consensus, the Member State
representatives agree to a decision without a formal vote. In constructive abstention, which
applies to CFSP and CSDP, the abstainer accepts that the EU is committed to a course of
action, but the Member State is not obliged to carry it out.
In qualified majority voting (QMV), votes are weighted by the population size of each
country, but not proportionately. For example, Poland’s population might be ten times as
large as Luxembourg’s, but Poland does not get ten times as many votes. Currently, the
UK, France, Germany, and Italy get 29 votes each; Cyprus, Estonia, Latvia, Luxembourg,
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and Slovenia get 4 votes each. From March 2017, decisions on proposals from the
Commission or the High Representative for CFSP a qualified majority is reached if 55 per
cent of Member States (16 out of 28) vote in favour or if it is supported by Member States
representing at least 65 per cent of the total EU population. A ‘blocking minority’ will have
to include at least four Council members representing more than 35 per cent of the EU
population. Similarly, when not all Council members participate in the vote, for example
due to an opt-out in certain policy areas, a decision is adopted if 55 per cent of the
participating Council members, representing at least 65 per cent of the population of the
participating Member States are in favour. This will give more clout to the more populous
Member States. There is also a mechanism for ‘enhanced cooperation’ which allows for
a minimum of one third of Member States to co-operate within the structures of the EU
without all Member States.
As with other EU institutions, the Council has a president, but it is a member country, not a
person. The presidency rotates on a six-month basis.
Although the Council is a single institution, its name will vary depending on which matter
is being discussed. Confusingly, the European Council (see below) is also often referred
to the as ‘The Council’. Even worse, both are often confused with the Council of Europe,
which has nothing to do with the EU.
The big five (3): The European Council
The European Council is made up the Heads of Government and State (HOGS) of
each Member State. They are joined by the President of the Commission and the High
Representative. The European Council is by far the most powerful EU institution, even
though it has no legislative powers. It is also the easiest to describe.
The European Council has the power to appoint the Commission President (with the
recommendations of the Council and a vote of approval from the EP), and the President
and Executive Board of the European Central Bank (ECB). It decides on the Budget,
concludes the most important Treaty negotiations, and the final terms of enlargements,
and issues broad guidelines for EU policy. It meets at least twice a year (often more
frequently). Presidents of the European Council serve 2.5 years and are elected by the
European Council using QMV.
The big five (4): The European Parliament (EP)
The European Parliament (EP) is the EU’s only directly elected body.
The Allocation of seats, is, like QMV, allocated on the basis of the size of Member Sates’
population, but not proportionately. There are currently 751 MEPs (750 plus the President).
No country can have fewer than 6 or more than 96 MEPs. Elections are every five years.
MEPs are selected by their domestic political parties, but group into transnational political
groups once they arrive in Strasbourg. There are currently 8 political groups, but about
16 MEPs are unaffiliated. The rules dictate that each political group must have at least
25 members to qualify for a budget, and, to avoid excessive fragmentation, must have
members from more than one Member State. The political composition of the EP is
dominated by the traditional centre-right and centre-left divide. The largest group (250
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MEPs) is the European People’s Party (EPP), comprising European Christian Democrat
or Conservative parties. The second largest is the Progressive Alliance of Socialists and
Democrats (190 MEPs). Membership in the other political groupings range from 74 to 38,
the largest being the European Conservatives and Reformists which was founded with the
Movement for European Reform after the 2009 European elections at the behest of David
Cameron.
As in other parliaments, the EP is organised into committees, of which there are twenty.
The Committees receive, scrutinise, and comment on legislative proposals. The EP is often
dismissed as a talking shop, but in fact it has substantial responsibilities and its powers
were greatly enlarged following the Lisbon Treaty. Its two main tasks are sharing legislative
responsibilities with the Council of Ministers and the Commission and overseeing all EU
institutions, but especially the Commission. The bulk of EU legislation is decided by the
EP and the Council in a process known either as the co-decision procedure or ordinary
legislative procedure. As we have seen, the appointment of a Commission can’t proceed
without EP approval.
The President of the EP presides over its debates and activities and represents it within the
EU and internationally. The president’s signature is required for enacting most EU laws and
the EU budget. EP presidents serve two-and-a-half-year terms, normally divided between
the two major political parties.
The big five (5): The European Court of Justice
As with other EU institutions, the European Court of Justice (ECJ) is often referred to by
different names, including the EU court or the EC Court. The ECJ settles disputes between
Member States, between Member States and the EU, between EU institutions, and
between individuals and the EU (although individuals can also take their cases directly to
the ECJ).
The ECJ has had a major impact of EU integration, largely through the large number of
decisions it made before the enactment of the SEA. It consist of one judge per Member
State who serve for six years, appointed by common accord with the Member State. It is
worth pointing out once again that it can only adjudicate in areas specifically allowed by
the Treaties.
The Budget
The Budget has been among the more controversial topics in the referendum, but the
actual debate has so far yielded little information on how it is agreed and on what it is
for. This section briefly describes the budget negotiation process and its main items of
expenditure.
Annual expenditure, which is the figure quoted most often in the media, is determined
by what are known as seven-year Multi-Annual Financial Frameworks (MFFs) which are the
subject of negotiation between the Commission and the Councils and subject to approval
by the EP. Once agreed, the MFF becomes law as provided for in the Lisbon Treaty. The
current MFF (2014-20) took about two and a half years to negotiate. The process began
in June 2011 when the Commission put forward a draft MFF regulation, subsequently
amended in 2012 in anticipation of Croatia’s accession and in response to new economic
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data. Political agreement was reached in a February 2013 meeting of the European Council
and in June 2013 the Presidents of the Commission, the EP, and the Council confirmed the
proposed limits. In November 2013 the EP gave its consent to the regulation, which was
adopted by the Council later in December. A review is expected by the end of 2016 which
will allow the new EP and Commission to re-assess its priorities.
The MFF provides a seven-year framework for spending. The annual budget is based on
the limits established by the MFF and is decided in a process involving the Commission,
the Council and the EP. An adjustment is made at the beginning of each year to take
account of changes in Gross National Income (GNI) forecasts and other technical changes.
The annual EU budget is currently worth about €145bn (2015 prices) which is less than 1
per cent of its combined GDP.
The bulk of the budget (about 74 per cent) is based on Member States’ contributions
applied as a proportion of each country’s GNI. Other sources are customs duties on a
range of products applied to imports from non-EU countries, additional Member States’
contributions based on VAT receipts, and sugar levies. The EU’s resources are set out
in the Own Resources Decision (ORD) which is negotiated alongside the MFF but set
out in separate regulations. The ORD has to be agreed by each Member State, and The
European Union (Finance) Act 2015 requires the approval of the UK Parliament.
Since 1985, the UK’s contribution has been subject to a rebate worth between £3bn and
£5bn between 2009-15. After the rebate, the UK’s gross contribution in 2015 was £12.9bn
in 2015. It received £4.4bn from the EU, making its net contribution about £8.5bn, which, as
with the EU as a whole, is somewhat less than 1 per cent of GDP.
Figures are available on a state-by-state basis for 2014. On a per capita basis, the UK made
the eighth largest net contribution to the EU’s budget, after the Netherlands, Sweden
Germany, Denmark, Finland, Austria, and France. In total terms, the UK was the third
largest net contributor, after Germany and France. All of the Eastern and Central European
Member States that acceded in 2004, 2008, and 2013 made large negative contributions,
meaning they received more than they paid in, the largest amount going to Poland. Among
the older Member States, Spain, Portugal and Greece also made negative contributions.
Belgium and Luxembourg, although very rich countries, received large payments from the
EU because they are home to important EU institutions.
The chart below shows how the budget is spent by broad headings. Accounting for 47
per cent of the total is Smart and Inclusive Growth, which means funding for economic
development. This heading includes the Structural Funds, dealt with in more detail below.
The second largest item (Sustainable Growth: Natural Resources) funds the Common
Agricultural Policy (CAP), rural development, and fisheries policy. Among the smaller items
is Administration (6 per cent) and Global Europe (6 per cent) which includes support for
the EU’s foreign policies and international development aid. Security and Citizenship (2 per
cent) includes asylum, migration, public health, consumer protection, culture, and youth.
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The EU’s Budget by main expenditure headings
The sections below on the policy outputs of the EU sheds more light on these budget
priorities.
The policy outputs of the EU
The Single Market
As pointed out several times above, the Single Market (or Internal Market) is the EU’s most
important achievement. This sub-section explains what the Single Market is and how the
institutions of the EU support it.
An essential assumption in the Single Market is that market size matters. Having access
to a large market means that firms can get bigger, whilst competition ensures that they
also become more efficient, forcing them to lower prices, offer better quality, and gain
competitiveness in external markets. Historically, Europe’s national markets have been
separated by a host of barriers. The most obvious of these – tariffs on imports and import
quotas – were removed with the completion of the Common Market in 1969, together
with the maintenance of a common external tariff. However, as we have seen, Europe’s
economy remained divided by thousands of non-tariff barriers (NTBs) that arise because of
national differences in product standards and regulations, or environmental, industrial, or
health and safety standards. A good example is refusing to accept the results of a safety
test conducted in the originating country which therefore has to be performed again
in the importing country, raising costs and hence the prices paid by consumers. These
regulations might be abolished altogether, if not that usually they are identified with a
wider public interest. The difficulties in attempting to create a Single Market is in deciding
where a local regulation serves the public interest or is merely a device for gaining unfair
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protection or, where the public interest is essential, in designing regulations or standards
that are acceptable to producers in all countries.
As indicated, the Single Market is a work in progress, and whilst considerable success has
been gained in creating a Single Market for goods, much needs to be done in creating
a single market for services and capital. Services covers such a wide variety of activities
that it is difficult to generalise on whether the EU’s services market is opened or closed.
National obstacles have remained entrenched in some services like retail banking, but
some EU directives have opened up markets in wholesale banking, insurance, and
telecommunications. Enactment of the provisions of the Financial Services Action Plan has
promoted better integration of private and government bond markets and cross-border
flows of venture capital and equity finance. Further integration of financial services has
been complicated by the laborious process of agreement over new regulations following
the financial crisis. The City of London’s position within the EU is, of course, one of the
issues debated in the referendum, and a case is made for both ‘in’ and ‘out’ from the
vantage point of the City. The financial press covers the arguments of both sides in great
detail.
Competition policy
Stimulating competition on a continental scale by removing market barriers, can, somewhat
paradoxically, create further barriers to competition as firms become more efficient by
merging and expanding (reaping economies of scale). But by getting bigger, firms can
use their market power to fix prices, block new entrants, or engage in predatory pricing
practices designed to force other firms out of business. An industry dominated by a few
large firms might collude as a cartel to fix prices or restrict output. A member government
might try to protect a domestic industry through subsidy. For all these reasons, the Single
Market requires a competition policy.
The policy is implemented by the Commission with disputes settled in the ECJ. The
operation of competition policy is emphatically supranational for obvious reasons. As
individual countries might find it difficult to resist political pressures to protect their
industries, the application of competition policy must be seen to be impartial (in the sense
that the interests of no one Member State are favoured) and effective. Assistance given
by governments to protect national businesses are prohibited and controlled through the
state aid rules, meant to prohibit any firm gaining an unfair advantage through government
support. This does not mean that governments cannot provide support to firms in ways
that are consistent with the EU’s objectives (for example through grants for training),
providing that no firms receive benefits that are not available to all. Other exceptions
include grants made to firms in Regional Selective Assistance Areas meant to assist the
regeneration of backward economic areas. In the last recession, state aid rules were
relaxed considerably to assist recovery.
Competition policy applies to non-EU firms operating inside the EU. In 2007, the
Commission’s decision to fine Microsoft nearly €497m for abusing its dominant position
was upheld in the EU’s courts. In 2009, a similar complaint was made against Microsoft
for tying Internet Explorer to Windows, thereby distorting competition from other web
browsers. On this occasion, Microsoft quickly agreed to eliminate the built-in browser.
EU competition rules have been successfully applied to foreign firms with no production
facilities in the EU, because of the Commission’s concerns for lost sales for firms based in
the EU. A famous example is the Commission’s objections to the 1997 Boeing-McDonnell
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Douglas merger, which resulted in important commercial concessions to the EU made
by the US-based manufacturer. The weapon used by the Commission was the threat of
stopping sales of Boeing McDonnel-Douglas aircraft to European airlines.
The Common Commercial Policy
When EU Member States removed tariffs between themselves, they created a common
external tariff (CET). The Common Commercial Policy (CCP) which determines how the
EU negotiates trade agreements with the rest of the world is another core supranational
function. The CCP refers to the needs, instruments, and objectives of the EU with regard
to the bilateral and multilateral trade negotiations, agreements, and actions. The EU is
an export driven economy (it exports more than the USA), and it needs to open up new
markets around the world, which it can only do by opening up its own markets.
The European Council sets broad guidelines for the CCP and approves major international
trade agreements. QMV is the standard decision making mechanism in the CCP except
in the case of services, intellectual property, and Foreign Direct Investment (FDI). Firms
outside the EU which establish a presence in the EU have ‘passporting rights’ which means
that they can operate within the EU on the same basis as other EU firms. Because of this, it
is often claimed that the Internal Market has acted an important stimulus to FDI.
The core instrument is the CET, which the EU regulates. It is a contracting partner with the
World Trade Organisation (WTO) with which it concludes multilateral trade agreements.
The EU also has bilateral trade agreements with third countries (about 53), industrial free
trade agreements (as with EFTA), association agreements, Euro-Med partnership accords,
Stabilisation and Association Accords (SAAs) Partnership and Co-operation Agreements
(PCAs) and interregional accords. New bilateral trade agreements are continually being
negotiated. The Comprehensive Economic and Trade Agreement (CETA) between Canada
and the European Union was concluded in August 2014, but negotiations started in 2009.
Some of these trade agreements are meant to assist political or security objectives. For
example, in the Generalised System of Preferences Programme, import levies are waived
for the world’s poorest countries. Trade sanctions are imposed on countries deemed to
have breached international accords on human rights.
Agriculture, the Common Agricultural Policy (CAP), and
Fisheries
As we have seen, the second largest item in the budget is entitled Sustainable Growth:
Natural Resources which is concerned mostly with the CAP and the common fisheries
policy.
The CAP is indisputably the EU’s ‘Marmite’ policy, both loathed and loved.
Because of post-war memories of food shortages and hunger, agricultural policy was an
important element in the early formation of Common Market, with the aims of ensuring
food security and retaining a rural economy. An early instrument was a system of price
supports whereby the EU bought any excess production at a price needed by farmers to
cover their costs and make a small profit. Older readers might remember a degree of overachievement in this respect, leading to the creation of what were known as ‘wine lakes’ or
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‘butter mountains’. Excess production tended to be ‘dumped’ by exporting to countries
outside the EU at lower than cost prices. At the same time, EU agriculture was protected
by a system of variable import levies.
The European Council sets overall farm policy guidelines, and day-to-day functioning is
handled by the Commission. The Council (of Agricultural Ministers) decides on legislative
proposals on the basis of QMV. Since Lisbon, the EP has co-equal decision-making
authority with the Council in the CAP.
In the 2014 MFF, about 74 per cent of the money allocated to Sustainable Growth: Natural
Resources is allocated to the European Agricultural Guarantee Fund (EAGF), described
as “market related expenditure and direct payments”, which is the name for the system
of price and income supports under the CAP. About 24 per cent is devoted to the
European Agricultural Fund for Rural Development (EAFRD), which is for the the economic
development of rural areas. Much smaller amounts are allocated to the European Maritime
and Fisheries Fund (EMFF) and to climate change measures.
The current proportion (39 per cent) in the budget devoted to agriculture is much smaller
than a high of 70 per cent in the 1980s. Further, the policy has moved away from a system
based on price supports and import levies to direct income payments to farmers, and to
link subsidies to practices favourable to food safety, animal welfare, and environmental
sustainability. There is also a progressive de-coupling of payments from particular food
products. The aims are to pay farmers enough to keep them farming (thus ensuring food
security) whilst exposing the sector to more rigorous market-based competition. More of
the funds are spent on rural development and farm modernisation.
The Common Fisheries Policy (CFP) was created to manage the EU’s fish stocks, and
currently is motivated primarily by a concern to preserve dwindling stocks. It sets quotas by
fish species, known as Total Allowable Catch (TAC).
Regional Policy and Economic Development
As with competition policy, regional policy is an essential component of the Single Market.
The preamble to the 1957 Treaty of Rome gave addressing the economic backwardness of
less favoured regions as one of the reasons for establishing the Community. The European
Social Fund (ESF) was set up in 1958 to provide assistance to the unemployed, it being
recognised from the start that integration would produce ‘winners’ and ‘losers’. The
European Regional Development Fund (ERDF) was established in 1975 as a mechanism
for financing regional economic development. In part, ERDF was introduced to appease
the UK’s discomfort with the CAP. Given that integration drives greater efficiency through
rationalisation and concentration, it is easy to understand why regional policy is an essential
complement to the Single Market, because industries unable to withstand more intensive
competitive pressures tend to be concentrated regionally. Instruments like the ERDF were
meant to help less competitive regions adapt and re-structure.
The Structural Funds and the Cohesion Fund are the financial instruments of the EU’s
regional policy, and together amount to nearly 34 per cent of the EU’s planned expenditure
between 2014-20. In common with the general tendency to refer to different things by the
same names, the funds are sometimes referred to collectively as the Cohesion Funds and
as part of Cohesion Policy. Strictly speaking, the Cohesion Funds are targeted at countries
whose per capita GDP is below 90 per cent of the EU average and are for preparation for
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entry into full Economic and Monetary Union (EMU). The 2014-2020 Programme amounts
to €475 billion, of which €411.6 billion was for the Structural Funds and €63.4 billion for the
Cohesion Fund. The Structural Funds are delivered through the ESF and ERDF.
There are three objectives attached to the Structural funds, of which the most important,
in terms of overall funds allocated, is the Convergence Objective, otherwise known as
Objective 1. It aims to support the acceleration of the economic convergence of regions
where per capita GDP is below 75 per cent of the EU average. Objective 1 represents more
than half of the resources allocated to the Structural Funds, and in the current programme
is disproportionately targeted at the former Soviet Bloc countries in Central and Eastern
Europe, although Southern Italy and parts of Portugal and Spain also receive substantial
amounts. By supporting the development of economically less favoured countries, the
funds assist in the economic growth of the EU as a whole. In the current programme, the
UK receives about €10.8bn in Structural Funds. The UK retains two Objective 1 areas (West
Wales and the Valleys and Cornwall).
Structural Fund spending for the programming period 2014-20 is tied closely to wider EU
economic objectives, as advanced in the EU 2020 Strategy (the successor to the Lisbon
Economic Strategy) and the Gothenburg Strategy (on environmental sustainability). In
Europe 2020, targets are set for employment, research and development, climate change
and energy sustainability, education, and reducing poverty and social exclusion. The
Structural and Cohesion Funds sits within the budget item Smart and Inclusive Growth,
which amounts to 47 per cent of the overall budget. The largest items within this sub-set of
the budget are for research and development and scientific collaboration.
The Commission formulates and executes regional policy. It consults the Committee of the
Regions (CoR), a forum of local and regional governments. The Council and the EP share
legislative and budgetary responsibility.
Justice and Home Affairs
Justice and Home Affairs (JHA) is a cluster of related policies, encompassing asylum, police
co-operation, and the illegal movement of persons. Ireland and the UK have a flexible optouts from legislation adopted in many of the areas previously part of the pre-Lisbon Justice
and Home Affairs (JHA) pillar. After the Lisbon Treaty, the UK had the option to opt out of
all the police and criminal justice legislation adopted prior to the treaty’s entry into force. A
notable exception is the European Arrest Warrant which Britain used in 2005 to extradite a
fugitive associated with a bombing attempt in London from Italy to the UK.
JHA convers a sensitive set of issues from the perspective of national sovereignty, but
the internationalisation of certain types of crime, especially terrorism, is likely to stimulate
further co-operation. It is also true that the Schengen system of border control, associated
with a common border agency (Frontex) and a system of protocols for dealing with asylum
claims, has been under immense pressure because of the refugee crisis, in turn creating
additional political pressures for the union.
The Eurozone
The creation of a single currency (the euro) and the crisis that unfolded in the Eurozone
following the global financial crash of 2008 has, not just for the UK, been among the most
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troubling and controversial aspects of the EU. The crisis has undoubtedly contributed to
a rise in Eurosceptic sentiment and has had a destabilising effect across the union as a
whole. For these reasons, it is appropriate to bring this primer to a close with a brief review
of the euro.
To understand the origins and development of the euro, we need to first briefly consider
the evolution of post-war currency policy. As pointed out above, among the earliest
crises faced by the fledging EU was the currency crisis accompanying the collapse of the
post-war Bretton Woods System. The system was set up after the Second World War to
stabilise exchange rates, because fluctuating exchange rates were identified as among
several causes of economic instability between the two world wars. In the Bretton Woods
System, currencies were pegged, within bounds, to the US dollar whose value was in turn
maintained by the gold standard. The initial purpose of the International Monetary Fund
(IMF) was to provide support for countries that needed injections of cash to maintain the
value of their currencies. However, strains appeared in the system in the late 1960s in part
because of relaxations in capital flows, and in part because the USA could not maintain the
value of the dollar against gold.
For Europeans, as we have seen, the possibility of floating exchange rates impeded the
progress of economic integration in Europe, because inefficient sectors could shelter
behind a devalued currency. Exchange rates fluctuations also increase the costs and risks
for business of trading across countries. Therefore a substitute was sought for Bretton
Woods, the first of which (the snake) was abandoned and in 1979 replaced by a new
system, the European Monetary System (EMS). At the heart of the EMS was the Exchange
Rate Mechanism (ERM) which attempted co-ordination through a central fund used to
support the stabilisation of currencies within a narrow band. When a country wanted to
revalue, it had to do so with the agreement of the other central banks, which meant that
finance ministers had to deliberate in secret, otherwise they would simply offer a one-way
bet to the currency markets. Not surprisingly, the markets closely scrutinised the system
for any sign of revaluation, but actually forced one in 1992, when, in one day of sustained
selling, they forced the pound and the UK out of the ERM.
The currency turmoil of the EMS actually reinforced the case for a single currency. The
steps to be taken towards it were formally agreed at Maastricht. Among these were a
series of convergence criteria regarding inflation, interest rates, membership of the ERM,
and debt-to-GDP ratios. Stage one of EMU, the completion of the single market (see
below), was deemed to be a reality by 1 January 1994. Stage two of EMU lasted until
the introduction of the single currency in 1999, and consisted of a series of preparatory
activities including the formation of the European Central Bank (ECB) and the agreement
of the Maastricht criteria for EMU entry. Stage three was the launch of the euro itself
in January 1999 as an electronic currency, by which time 11 Member States met the
Maastricht criteria. Between January 1999 and January 2009, five new members were
admitted. Estonia joined the Eurozone in January 2011. As we have seen, The UK, Sweden,
and Denmark have permanent opt-outs.
All currencies have to be governed by a single interest rate and a single exchange rate (the
instruments of monetary policy), and for the euro, this is undertaken by the ECB, based in
Frankfurt. The ECB’s prime responsibility, as with all central banks, is price stability, which in
normal times means meeting inflation targets through the careful application of the interest
rate. Despite having surrendered sovereignty over monetary policy, each Eurozone country
has retained its own central bank and retains sovereignty over fiscal policy. This means that
Member States can finance public spending by borrowing, which can in some instances
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have ‘spill-over effects’ for other Eurozone countries. For example, excessive borrowing
by one Member Sate can push up borrowing costs for other Member States. Some sort of
alignment of fiscal policy was attempted through the Stability and Growth Pact (SGP) which
was devised to eliminate excessive deficits. The SGP was policed by ECOFIN (the Council
of Finance Minsters) and the Commission.
Many commentators have viewed the retention of sovereignty over fiscal policy by Member
States as a fatal flaw in the design of the euro, but others have likened it to a unique form
of what is known as ‘federal federalism’ which in some countries might exist between a
central government and its local or regional governments. Another criticism is that the
Eurozone does not conform to what to what is known as an optimal currency area (OCA), or
an economic zone which shares a set of economic conditions such that a single exchange
and interest rate entails no, or little, cost. HM Treasury under Gordon Brown drew on OCA
theory to set out the conditions that would have to be fulfilled for the UK to join the euro
(which meant never). For example, one of the questions asked was whether business cycles
across the zone were synchronised so that a high interest rate aimed at countries at the
high end of the cycle would not damage countries emerging from the low end of the cycle.
Whatever the usefulness of OCA theory, it does draw attention to how the eurocrisis
unfolded in different ways in different countries. However, all countries shared the common
feature of high indebtedness that followed the financial crash of 2008.Governments
everywhere had to re-capitalise banks, purchase toxic assets, and boost their economies
by spending – all at a time when tax revenues were falling because of the slump. Some
countries, like Ireland and Spain, had pursued highly disciplined fiscal policies before the
crash, but found themselves in especially high levels of debt because of the depth of their
banking crises. Other countries, like Greece and Portugal, had allowed public debt to grow
too high during the boom years of the late 1990s and early 2000s, and ran into solvency
problems as the crash exposed the underlying weaknesses of their economies.
Some more explanation is required here of the mechanisms at work, particularly as they
apply to Greece. Much public borrowing is financed by the private sector through the
issues of bonds. If, for any reason, the markets start to believe that the government can’t
pay back its debt, the interest paid on the debt will rise, making it even harder to pay off.
The process is to some extent self-fulfilling, because investors act as much on what they
believe other investors believe as they do on their actual beliefs about the underlying
status of any asset class. But by early 2010, the interest rate on Greek debt had risen to
such an extent that the Greek Government was in desperate trouble. Most governments
reaching this point of a financial crisis apply for help from the IMS.
What made the Greek problem a Eurozone problem was the threat of what is known as
contagion. If investors view the debt of certain countries in the zone as risky, they will
start to view other countries with suspicion. This is particularly so if the other countries
also have high debts and troubled banking systems. Further, public debt and private debt
are interlinked: other banks in the zone might be holding the debt of countries who are
deemed at risk of becoming insolvent, throwing suspicion on the banking system within
the zone as a whole. The threat of contagion was one of the considerations that promoted
the ECB, the IMF and the EU (collectively known as the Troika) to implement a series of
loans and emergency measures for countries experiencing especially serious difficulties.
The reaction of the Troika was initially slow because of uncertainties over whether the ECB
was legally entitled to act in this way and because of an earlier explicit rule by the ECB that
it would not allow IMF intervention in Eurozone affairs.
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The Troika’s financial interventions have been followed up by the ECB with a series of
measures meant to re-inject liquidity into the EU’s banking system. These have included
below zero interest rates and a programme of quantitative easing. In addition, a series of
new banking regulatory instruments have been tested and there are proposals for new
system of banking regulation.
Ireland exited its rescue programme in 2013 and Portugal followed in 2014, both
countries having paid off a large proportions of their loans. The interest on government
debt has stabilised in most countries in the zone, but problems remain with Greece’s
debt obligations. IMF projections indicate growth of 1.6 per cent and 1.7 per cent in the
Eurozone for 2016 and 2017 respectively. This is somewhat slower than overall global
growth of 3.2 and 3.5 per cent and of UK growth of 1.9 and 2.2 per cent in the same years.
However, growth within the zone is highly mixed, with Ireland growing in 2016 by 5.0 per
cent and by 3.6 in 2017, and with Spain finally picking up with growth of 2.3 per cent in 2017.
There is much speculation about how the Eurozone will evolve institutionally, with the
debate hinging on whether it will opt for supranational fiscal integration (and hence the
surrender of some national sovereignty over borrowing and spending) or whether it will
adopt a range of other instruments for closer intergovernmental fiscal co-operation. No
further comment is offered on these possibilities here.
Further reading/sources
Treasury Committee report ‘The economic and financial costs and benefits of the UK’s EU
membership’ and press release.
Foreign Affairs Committee Report: Implications of the referendum on EU membership for
the UK’s role in the world and press release
House of Commons European Scrutiny committee
House of Lords EU Select Committee
The EU and world trade (Europa)
Guide to the EC’s Directorates
Guide to the European Union’s Institutions
Related briefings
The EU Referendum and UK Environmental Policy
The Development and Delivery of European Structural and Investment Funds Strategies:
Supplementary Guidance for LEPs
Structural and Investment Fund Strategies in England: Preliminary Guidance for Local
Enterprise Partnerships
TTIP update September 2015
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and local authority membership organisation. Our
mission is to strengthen local democracy to put citizens
in control of their own lives, communities and local
services. We work with local councils and other public
services providers, along with a wider network of
public, private and third sector organisations.
Third Floor,
251 Pentonville Road,
London N1 9NG
020 7554 2800
[email protected]
www.lgiu.org.uk
© LGiU June 2016